Effectiveness of Capital Controls and Sterilizations in China

Since 2003, China has been facing a trilemma of determining how to maintain independent monetary policy and limit exchange rate flexibility simultaneously, while facing persistent and substantial international capital flows. The present paper is an empirical evaluation of the effectiveness of China＇s sterilizations and capital mobility regulations, measured by sterilization and offset coefficients, respectively, using monthly data between mid-1999 and March 2009. We find that the effectiveness of China＇s sterilizations is almost perfect in terms of the monetary base, but not in terms of M2, and that China＇s capital controls still work but are not quite effective. Recursive estimation reveals that increasing mobility of capital flows and decreasing effectiveness of sterilizations might undercut China＇s ability to maintain monetary autonomy and domestic currency stability simultaneously. To solve the trilemma smoothly, China＇s monetary authority should continue to relax the management of the exchange rate, and take further steps towards deregulation of capital outflows.     

Development in China＇s Foreign Trade： 2003-2012

China＇s foreign trade has entered a new stage, marked by some profound changes since 2003. After 5 years ＇consecutive high growth, China＇s foreign trade experienced a significant slowdown in growth following the onset of the global financial crisis in 2008. The purpose of this article is to present a review of the development in China＇s foreign trade over the past l O years, and to explore important changes that have taken place during this period of time. A majorfinding of the presentpaper is that the traditional forces driving the high export growth in China, that is, low-cost labor, low-cost resources and low-cost money, have been disappearing. The policy implication is that over the next l O-15 years, the most important conditions for sustaining high export growth will be promoting the development and export of private enterprises in traditional heaw industries and high-technology industries, and relying on technological progress and high produc6vity to propel export expansion.     

Comment from the Editor-in-chief

Ronald McKinnon is one of the most respected foreign economists in China and his view on exchange rate policy is well known and very influential in China. His and Gunther Schnabl＇s paper China＇s Exchange Rate and Financial Repression： The Conflicted Emergence of the Renminbi as an International Currency is one of the most serious and comprehensive studies of China＇s exchange rate policy and capital account policy in recent years.     

Is China up to the Test？ A Review of Theories and Priorities for Education Investment for a Modern China

This paper reviews the key theories relating to the role of education in economic development and social change and how education, as a critical component of total factor productivity, contributes to sustained economic growth. It examines how China ＂s education policy reflects the country＇s unique dual economy. Focusing on the post-reform period, the paper contends that while progress has been made, there are risks to China＇s future growth prospects from failing to reap the benefits of sound education policy. It argues that if the Chinese education system is to continue to be a driver of rather than a drain on economic growth, and if China is to successfully manage its transition towards more inclusive, sustainable and equitable growth, reforms will be needed to improve the quality of education at all levels and to create an environment in which China＇s extensive human capital is duly recognized and respected. Crucially, the education system should be transformed to ensure it promotes a comprehensive range of human capabilities, including those that go beyond the part humans play in augmenting production possibilities.     

China＇s Labor Transition and the Future of China＇s Rural Wages and Employment

This paper contributes to the assessment of China＇s rural labor markets. According to our data, the increase in off-farm employment that China experienced during the 1980s and 1990s continued during the 2000s. Our analysis shows that migration has become the most prevalent off-farm activity, although the destination of migrants is shifting from outside of one＇s province to destinations closer to home. The present paperfinds that large shares of male and female individuals, especially those under 40 years, are working off the farm. These findings represent an important contribution to the labor economics field. First, the results of the present paper reveal that the labor transition from the agricultural sector to the non-agricultural sector for key segments of China＇s rural labor force is nearly complete. Second, although a large share of China ＂s rural labor force work in agriculture, most of these workers are older men and women （and likely would not be willing to take low-wage, labor-intensive jobs）. Third, the rising unskilled wage rate in China is partially a result of the tightening of the labor force in the young age cohorts. Finally, due to factors associated with the one child policy and other demographic transition forces, successive age cohorts will continue to fall in absolute number in the coming decade. Assuming China＇s growth continues, we expect to see further wage increases since it will take higher wages to coax more workers to work off the farm.     

CO2 Emissions Embodied in China＇s Foreign Trade： An Investigation from the Perspective of Global Vertical Specialization

In light of the growth in vertically specialized in global trade, the present paper uses input output tables from the World Input-Output Database to construct an environmental multi regional input-output model to calculate the CO2 emissions embodied in China＇s international trade during 1995-2009. The advantage of this model lies in its incorporation of the re exported CO2 emissions component embodied in trade and its ability to differentiate domestic sourced CO2 emissions from foreign-sourced CO2 emissions in trade. The results show that carbon emissions embodied in both China＇s exports and imports increased significantly during 1995-2009. One important reason for this is that the re-exported carbon emissions embodied in China＇s imported intermediate inputs increased substantially during this period. Our research reveals that accelerating the transformation of trade pattern and upgrading processing trade should be emphasized in the formulation of policy to prompt CO 2 emissions abatement in China.     

Regional Environmental Performance and Its Determinants in China

A growing awareness of environmental quality hasplaced increasedpressure on China to improve environmental protection and regulations in the country. How have the regional economies in the country performed in terms of environmental efficiency？ The answer to this question is yet to be explored in the case of China. The objective of this paper is to present a quantitative analysis of environmental performance in China＇s regional economies and to examine the determinants of regional variation in performance. The findings are used to draw policy implications for environmental protection and are helpful in the discussion of China＇s future sustainable development.     

Reaping the Economic Benefits of Decarbonization for China

Chinaneeds to reduce its carbon emissions if global climate change mitigation is to succeed. Conventional economic analysis views cutting emissions as a cost, creating a collective action problem. However, decarbonization can improve productivity andprovide co-benefits that accord with multiple national policy objectives. We track China ＇ s progress in reducing the emissions intensity of the economy, and construct a macro scenario with China＇s carbon emissions peaking in the 2020s. Investment in greater energy productivity and economic restructuring away from heavy industries can bring productivity gains, and decarbonization of energy supply has important co-benefits for airpollution and energy security. Combined with lower climate change risks and the likelihood thai China＇s actions will influence other countries, this suggests that cutting carbon emissions is not only in China＇s self-interest but also in the global interest. To properly identify the true costs and benefits of climate change action requires new thinking in economic analysis.     

Effect of Money Supply on Real Output and Price in China

Over the past 30 years, China has achieved remarkable long-term economic growth. Using quarterly data, we study the effects of money supply on real output and inflation in China between 1993 and 2008. To this end, we use money supply shocks afler filtering out the expected component of the money supply. Our findings provide evidence supporting the asymmetric effect of positive and negative money supply shocks on real output and inflation in China. That is, real GDP growth in China responds to negative money supply shocks but not positive money supply shocks. In addition, inflation responds to positive money supply shocks but not negative money supply shocks. We conclude that the People＇s Bank of China＇ s policy of steady monetary growth appears to be appropriate. Our study offers important policy implications for China.     

What Prompts the People＇s Bank of China to Change Its Monetary Policy Stance？ Evidence from a Discrete Choice Model

In the present paper, we model the policy stance of the People＇s Bank of China （PBC） as a latent variable, and the discrete changes in the reserve requirement ratio, policy interest rates, and the scale of open market operations are taken as signals of movement of this latent variable. We run a discrete choice regression that relates these observed indicators of policy stance to major trends of macroeconomic and financial developments, which are represented by common factors extracted from a large number of variables. The predicted value of the estimated model can then be interpreted as the implicit policy stance of the PBC. In a second step, we estimate how much of the variation in the PBC＇ s implicit stance can be explained by measures of its policy objectives on inflation, growth and financial stability. We find that deviations of CPI inflation from an implicit target and deviations of broad money growth from the announced targets, but not output gaps, figure significantly in the PBC＇s policy changes.